National Bank of Hungary Review: No need to panic, unless…

In line with our expectations, the Monetary Council decided to keep the base rate at 6.25% on 24 March. Unsurprisingly, in light of the war in the Middle East and related market turmoil, the National Bank of Hungary has reverted to a hawkish stance. We agree with the central bank’s view that it is too early to press the panic button.

As headline inflation hit a ten-year low in February, Hungary will be hit by the external price shock in a favourable position. Using our base case for energy prices, we predict that, after a brief period of acceleration, inflation will stabilise at around 4% in the second half of the year. If our base case holds (40% chance) and the impact of energy prices fades as expected, inflation will remain within the National Bank of Hungary’s tolerance band. This could pave the way for monetary policy easing in the second half of 2026, following a lengthy pause.

This energy price shock is hitting the country at a time when it is in a different position to that of 2022. Inflation is at its lowest, the labour market is weaker, and there has been three years of economic stagnation. However, economic policy reactions are better equipped to help weather this storm, which could lead to a better outcome than four years ago. In this respect, the impact on GDP growth may be stronger and the effect on inflation weaker than we currently anticipate.

If flows through the Strait of Hormuz return to normal by the summer, as we currently expect in our base case, our growth, inflation and foreign exchange trajectory suggests there will be room for a rate cut late in the third quarter. Therefore, we predict that the base rate will be 6.00% by the end of the year. However, if our 'long war' scenario plays out (30% chance), we believe that the forint would require additional support, and the NBH could follow the ECB's lead with the same number of rate hikes (most likely two) during the next couple of quarters.

The outcome of the rate setting meeting in March 2026 was in line with expectations. On 24 March, the National Bank of Hungary kept its key interest rate at 6.25%. The interest rate corridor (+/- 100bp) also remained unchanged. The Monetary Council seems ready to consider all options, as Governor Varga emphasised during the press conference.

Starting with the positives, the central bank was pleased to see inflation hit such a low level in February. Lower inflation also helped push down inflation expectations, although the survey was conducted before the war in Iran began.

In line with our view, Governor Varga repeatedly emphasised that the economic fundamentals are totally different to those of 2022. He highlighted the lower external and domestic inflation environment, the already positive Hungarian real interest rate and the current account surplus. Furthermore, Hungary has almost doubled its FX reserves over the past four years, providing flexibility.

The importance of FX stability was emphasised several times at the press conference in March. The central bank is implementing targeted measures to alleviate the impact of energy price shocks, providing foreign exchange reserves to energy importers to purchase the necessary hard currency. Governor Varga also emphasised that all options are on the table to preserve price and FX stability, including direct FX market interventions if the situation warrants it.

The forward guidance in the March press release shows a hawkish bias, stating that tight monetary conditions are warranted to maintain price stability. Furthermore, the final sentence of the forward guidance omits the 'meeting-to-meeting' remark regarding the decision-making process. We interpret this as a sign that the NBH has ruled out a possible rate cut in the short term.